Report

Geneva Reports on the World Economy

Geneva 11: The Fundamental Principles of Financial Regulation

Today's financial regulatory systems assume that regulations which make individual banks safe also make the financial system safe. The eleventh Geneva Report on the World Economy shows that this thinking is flawed. Actions that banks take to make themselves safer can - in times of crisis - undermine the system's stability. The Report argues for a different approach.

What is needed is micro-prudential (i.e. bank-level) regulation, macro-prudential (i.e. system-wide) regulation, and careful coordination of the two. Macro-prudential regulation in particular needs reform to ensure it countervails the natural decline in measured risk during booms and its rise in subsequent collapses. "Counter-cyclical capital charges" are the way forward; regulators should adjust capital adequacy requirements over the cycle by two multiples - the first related to above-average growth of credit expansion and leverage, the second related to the mismatch in the maturity of assets and liabilities. Changes to mark-to-market procedures are also needed.

Macro- and micro-prudential regulation should be carried out by separate institutions since they differ in focus and expertise required. Central Banks should be tasked with macro-prudential regulation, Financial Services Authorities with micro-prudential regulation. Improved international coordination is also important. Since financial and asset-price cycles differ from country to country, counter-cyclical regulatory policy needs to be implemented mainly by the "host" rather than the "home" country.

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Shin, H, A Persaud, A Crockett, C Goodhart and M Brunnermeier (eds) (2009), ‘Geneva 11: The Fundamental Principles of Financial Regulation‘, CEPR Press, Paris & London. https://cepr.org/publications/books-and-reports/geneva-11-fundamental-principles-financial-regulation

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Shin, H, A Persaud, A Crockett, C Goodhart and M Brunnermeier (2009), ‘Analytical Background‘, in Shin, H, A Persaud, A Crockett, C Goodhart and M Brunnermeier (eds), Geneva 11: The Fundamental Principles of Financial Regulation, CEPR Press, Paris & London. https://cepr.org/publications/books-and-reports/geneva-11-fundamental-principles-financial-regulation

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Shin, H, A Persaud, A Crockett, C Goodhart and M Brunnermeier (2009), ‘Nature of Systemic Risk‘, in Shin, H, A Persaud, A Crockett, C Goodhart and M Brunnermeier (eds), Geneva 11: The Fundamental Principles of Financial Regulation, CEPR Press, Paris & London. https://cepr.org/publications/books-and-reports/geneva-11-fundamental-principles-financial-regulation

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Shin, H, A Persaud, A Crockett, C Goodhart and M Brunnermeier (2009), ‘Who Should be Regulated (by Whom)‘, in Shin, H, A Persaud, A Crockett, C Goodhart and M Brunnermeier (eds), Geneva 11: The Fundamental Principles of Financial Regulation, CEPR Press, Paris & London. https://cepr.org/publications/books-and-reports/geneva-11-fundamental-principles-financial-regulation

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Shin, H, A Persaud, A Crockett, C Goodhart and M Brunnermeier (2009), ‘Counter-Cyclical Regulation‘, in Shin, H, A Persaud, A Crockett, C Goodhart and M Brunnermeier (eds), Geneva 11: The Fundamental Principles of Financial Regulation, CEPR Press, Paris & London. https://cepr.org/publications/books-and-reports/geneva-11-fundamental-principles-financial-regulation

Citation

Shin, H, A Persaud, A Crockett, C Goodhart and M Brunnermeier (2009), ‘Regulation of Liquidity and Maturity Mismatches‘, in Shin, H, A Persaud, A Crockett, C Goodhart and M Brunnermeier (eds), Geneva 11: The Fundamental Principles of Financial Regulation, CEPR Press, Paris & London. https://cepr.org/publications/books-and-reports/geneva-11-fundamental-principles-financial-regulation

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Shin, H, A Persaud, A Crockett, C Goodhart and M Brunnermeier (2009), ‘Other Regulatory Issues‘, in Shin, H, A Persaud, A Crockett, C Goodhart and M Brunnermeier (eds), Geneva 11: The Fundamental Principles of Financial Regulation, CEPR Press, Paris & London. https://cepr.org/publications/books-and-reports/geneva-11-fundamental-principles-financial-regulation

Citation

Shin, H, A Persaud, A Crockett, C Goodhart and M Brunnermeier (2009), ‘The Structure of Regulation‘, in Shin, H, A Persaud, A Crockett, C Goodhart and M Brunnermeier (eds), Geneva 11: The Fundamental Principles of Financial Regulation, CEPR Press, Paris & London. https://cepr.org/publications/books-and-reports/geneva-11-fundamental-principles-financial-regulation

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Shin, H, A Persaud, A Crockett, C Goodhart and M Brunnermeier (2009), ‘Conclusions‘, in Shin, H, A Persaud, A Crockett, C Goodhart and M Brunnermeier (eds), Geneva 11: The Fundamental Principles of Financial Regulation, CEPR Press, Paris & London. https://cepr.org/publications/books-and-reports/geneva-11-fundamental-principles-financial-regulation

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Shin, H, A Persaud, A Crockett, C Goodhart and M Brunnermeier (2009), ‘Appendix : The Boundary Problem in Financial Regulation‘, in Shin, H, A Persaud, A Crockett, C Goodhart and M Brunnermeier (eds), Geneva 11: The Fundamental Principles of Financial Regulation, CEPR Press, Paris & London. https://cepr.org/publications/books-and-reports/geneva-11-fundamental-principles-financial-regulation

Citation

Shin, H, A Persaud, A Crockett, C Goodhart and M Brunnermeier (2009), ‘Discussion and Roundtables‘, in Shin, H, A Persaud, A Crockett, C Goodhart and M Brunnermeier (eds), Geneva 11: The Fundamental Principles of Financial Regulation, CEPR Press, Paris & London. https://cepr.org/publications/books-and-reports/geneva-11-fundamental-principles-financial-regulation

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